2010 (7) TMI 631 - HC - Income Tax

High Court excludes excise duty & sales tax from turnover under sec 80HHC. Net agency commission for profit computation. Bad debts deductible without irrecoverability proof post-April 1, 1989.

The High Court held that excise duty and sales tax should be excluded from the total turnover under section 80HHC of the Act, following Supreme Court ... Deduction u/s 80HHC - excise duty and sales tax - apex court in the case of CIT v. Lakshmi Machine Works (2007 -TMI - 6557 - SUPREME Court) has held that: Commission, interest, rent, etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the `total turnover - Decided in the favour of the assessee Regarding the receipts by way of commission to be reduced in the profits of business is concerned - the income from commission is concerned, if any expenses is expended in earning the said income under section 37 of the Act, the said expenses is deductible and after such deduction, the amount arrived at would become part of the profits and gains of business - The very basis for computing section 80HHC deduction was 'business profits' as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover - If the assessee has two incomes with 'one common pool of expenses' and since 'principle of attribution' has been retained in the scheme of section 80HHC, both in terms of section 80HHC(3) - Decided in the favour of the assessee Regarding bad debt - Supreme Court in the case of T. R. F. Ltd. v. CIT (2010 -TMI - 76626 - SUPREME COURT) has held that after April 1, 1989 it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee - Decided in the favour of the assessee Issues Involved:1. Deduction of excise duty and sales tax from total turnover under section 80HHC of the Act.2. Calculation of 90 percent of the agency commission for computing 'profits of business' under section 80HHC of the Act.3. Allowance of bad debt written off as a deduction.Detailed Analysis:1. Deduction of Excise Duty and Sales Tax from Total Turnover:The first issue concerns whether excise duty and sales tax should be deducted when computing the total turnover under section 80HHC of the Act. The assessing authority initially included excise duty and sales tax in the total turnover, but the appellate authority and Tribunal reversed this decision. The High Court referred to the Supreme Court's judgment in CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC), which clarified that excise duty and sales tax do not form part of the turnover as they are indirect taxes recovered by the assessee on behalf of the Government. The Court affirmed that these taxes should be excluded from the total turnover to make the formula under section 80HHC workable. Consequently, the question of law was answered against the Revenue and in favor of the assessee.2. Calculation of 90 Percent of Agency Commission:The second issue pertains to whether 90 percent of the gross or net agency commission should be considered for computing 'profits of business' under section 80HHC. The Revenue argued for the gross commission, but the appellate authorities and Tribunal held that only the net commission should be considered. The High Court examined various judgments, including CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC) and CIT v. K. Ravindranath Nair [2007] 295 ITR 228 (SC), which supported the view that only the net commission, after deducting expenses incurred to earn it, should be included in the profits of business. The Court emphasized that the charge under the Act is on income, profits, and gains, not on gross receipts. Thus, the findings of the appellate authorities were upheld, and the question of law was answered against the Revenue and in favor of the assessee.3. Allowance of Bad Debt Written Off:The third issue revolves around the allowance of bad debts written off as a deduction. The assessing authority disallowed the bad debt on the grounds that the assessee failed to prove it was a trade debt, it had become bad, and it was written off as irrecoverable. The appellate authorities reversed this decision, and the High Court referred to the Supreme Court's judgment in T. R. F. Ltd. v. CIT [2010] 323 ITR 397 (SC), which held that post-April 1, 1989, it is sufficient for the bad debt to be written off in the accounts of the assessee without needing to establish its irrecoverability. Therefore, the appellate authorities were justified in allowing the deduction, and the question of law was answered against the Revenue and in favor of the assessee.Conclusion:- Both appeals were dismissed, and no costs were awarded.- The substantial questions of law were answered in favor of the assessee and against the Revenue in all issues.